I know some great real estate agents. Several that I have worked with have been extremely helpful in giving me great advice and information on buying or selling houses. I even work with a property manager agent, who has provided excellent service, but I would not ask them for tax advice and neither should you.
A real estate agent is of great assistance in providing you with real estate services, but the real estate taxable effect of short selling a home has made tax time for some short-sellers upsetting and finding themselves unexpectedly owing money to the IRS.
Here is the current rule – if you refinanced your home taking money out and using that money for anything but home improvements that money can be taxable. Here is an example:
Homeowner purchased home for $100,000, homeowner was able to refinance the house for $180,000. The homeowner received $80,000 in loan proceeds. The homeowner used $20,000 for new windows and counter tops. The remaining $60,000 was used for paying off debt or maybe buying a car. Does this sound familiar? This is what people were doing in the mid 1990’s through 2008.
Now homeowner looses job, the new job doesn’t pay as well. Homeowner needs to short sell. So he enlists the real estate agent who tells homeowner the debt is forgiven. Happily homeowner is relieved, sells home and thinks he is moving on.
Come tax time, homeowner sees his tax professional who gets to tell homeowner that he now owes taxes on $60,000 from the sale of the house. Homeowner derived the benefit of that $60,000 in cash from the refinance. The $20,000 is absorbed by the house as it was used for improvements but the balance was cash in the pocket so to say.
Sadly, I have to have this conversation with another client today.